By now I’m certain you would have a basic understanding of the call and put option

both from the buyer’s and seller’s perspective. However I think it is best to reiterate

a few key points before we make further progress in this module.

Buying an option (call or put) makes sense only when we expect the market to move

strongly in a certain direction. If fact, for the option buyer to be profitable the

market should move away from the selected strike price. Selecting the right strike

price to trade is a major task; we will learn this at a later stage. For now, here are a

few key points that you should remember –

1. P&L (Long call) upon expiry is calculated as P&L = Max [0, (Spot Price – Strike Price)] –

Premium Paid

2. P&L (Long Put) upon expiry is calculated as P&L = [Max (0, Strike Price – Spot Price)] –

Premium Paid

3. The above formula is applicable only when the trader intends to hold the long

option till expiry

4. The intrinsic value calculation we have looked at in the previous chapters is only

applicable on the expiry day. We CANNOT use the same formula during the series

5. The P&L calculation changes when the trader intends to square off the position well

before the expiry

6. The buyer of an option has limited risk, to the extent of premium paid. However he

enjoys an unlimited profit potential

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